While the U.S. is swept up in debt ceiling debates and shutdown finger-pointing, the crisis in Puerto Rico is accelerating.
“Economic growth has been stagnant or declining for many years, since 2006...and it’s not apparent to me or others whether there’s going to be an economic driver. So Puerto Rico has been relying on debt and I think we’re at a point where investors out there think we’re at capacity,” says Robert Donahue, managing director at Municipal Market Advisors.
The U.S. commonwealth is now $87 billion in debt (that’s $23,000 per citizen) and things aren’t getting any better. The summer sell-off in the Puerto Rican bond market hurt the already ailing territory and effectively shut it out from issuing new debt. Instead it’s funding essential operations with unsustainable, short-term solutions like bank credit. This is a problem that should worry many Americans because a large portion of the territories' bonds are held by U.S. mutual funds.
Unlike Detroit, Puerto Rico is unable to file for bankruptcy, and because it is considered an unincorporated territory, it can’t be bailed out by the U.S. government. “The territorial clause of the Constitution says only Congress can come in and help,” says Donahue. Considering the current state of the federal government that seems unlikely at best.
The Executive Branch is also able to legally help through economic development, something the Puerto Rican Senate president hinted at in a conference moderated by Donahue earlier this week. The Treasury, however, has clarified that it will issue no assistance plan for the territory.
Puerto Rican officials, for their part, are doing all that they can to turn the territory around. “They’re moving in the right direction,” says Donahue. “The rating agencies are being very patient with them...but they have really hit a level where if they go further they’re into the junk bond category. The issue is whether Puerto Rico will continue to maintain market access and whether the buyers believe what the rating agencies are saying.”
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